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IPO Lock-Ups: File or Confidentially Submit?

IPOs have been jumping off the shelves lately. Last week 10
companies went public in the U.S. and this week, IPOs on the calendar are expected
to have the largest one-week raise since the good old days of 2014. Stitch
Fix, an online personal shopping service, is gearing up to raise around $200 million
and Workspace Property Trust, a real estate investment company, is vying for about
$570 million. While the IPO investors are cheering and issuers rubbing their
hands in anticipation of wild fame and prosperity, the lawyers are almost
certainly burning the midnight oil on all of these deals. And in the middle of
the night those same lawyers might find themselves scrambling for the right
balance of the disclosure language in their prospectus and the most up-to-date
formulations of reps, warranties and covenants in their underwriting
agreements.

Here is where some good practical tips from a panel on IPOs
and Public Offerings by Seasoned Issuers, held at last week’s 49th Annual PLI Institute
on Securities Regulation, could come in handy. Most know that a typical IPO
includes a company lock-up pursuant to which the company promises that it will
not upset the delicate equilibrium of the post-IPO market for its shares by
doing something silly, like dumping a large quantity of its shares on said
market. As part of the same lock-up clause in the underwriting agreement, the
company typically also promises not to file a new registration statement with
the SEC. This is all fairly standard and has been done for years.

Enter the SEC’s Division of Corporation Finance which announced
on June 29 that it will accept draft registration statements for a confidential
non-public review before the company officially and publically files its
registration statement for the world to see.

So let’s picture this scenario. A company completes an IPO.
The lock-up language in its underwriting agreement is standard; it tells the
company not to file any new registration statements with the SEC for the
standard 180 day-period after the IPO. Four months after the IPO, business is
going great; there’s a lot of recognition of the company in the market and
everyone loves its widgets. IPO cash is gone, but the company’s momentum is
accelerating. The company needs to grow and wants to ride the public
satisfaction wave to raise some additional cash by doing a follow-on equity
offering. It needs to file another registration statement with the SEC. The 180
days of the lockup are a distant two months away. The management is itching for
cash. Business folks are breathing down the GC’s neck. The GC is sweating bullets
and taking the blame for holding up the company’s expansion.

Enter smarty-pants junior in-house lawyer. She reads up on
the latest SEC pronouncements and runs into the GC’s office with a triumphant,
“we can do it! We can file now! Forget the 180 days, all we have to do is
file confidentially now and go public as soon as the 180 days expire.” The GC
scratches his head. He looks at the underwriting agreement. It says nothing
about the company not being able to confidentially submit a registration
statement to the SEC. All it says is that the company cannot file with the SEC.

File is not the same as confidentially submit, right? Will
the underwriters throw a fit? Will they sue if the company goes ahead and
confidentially submits prior to the 180 day lock-up expiration? Will the
company need to get new underwriters? “What a mess!” thinks the GC as he scratches
his head again.

The panel at the PLI Institute last week recommended against
head scratching and for amending the traditional underwriting agreement
formulation by adding the simple words “or confidentially submit” to the
standard company lock-up paragraph.

The lawyers advising Stitch Fix, for example, did just that.
Their underwriting agreement reads: “During the period beginning from the date
hereof and continuing to and including the date 180 days after the date of the
Prospectus (the “Company Lock-Up Period”), [the company agrees with
each of the underwriters] not to (A) offer, sell, contract to sell,
pledge, grant any option to purchase, make any short sale or otherwise transfer
or dispose of, directly or indirectly, or
file with or confidentially submit to the Commission a registration
statement under the Act relating to, any securities of the Company that are
substantially similar to the Shares … .” (emphasis added)

The lawyers advising Workspace Property Trust, however, for
whatever reason, opted for the traditional formulation. Their underwriting
agreement reads: “During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the Prospectus
(the “Lock-Up Period”), [each of the Transaction Entities, jointly and severally,
agrees with each of the Underwriters] not to (i) offer, sell, contract to sell,
pledge, grant any option to purchase, make any short sale or otherwise transfer
or dispose of directly or indirectly, or
file with the Commission a registration statement under the Act relating
to, any securities of the Company that are substantially similar to the
Shares … .” (emphasis added)

Let’s hope they won’t need to start scratching
their heads a few months from now.

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